Problem 1:

a.

Cathy Chen, CPA

Income Statement

For the year end Dec 31, 2003

Sales Revenue 180000

Less: Operating Expenses
Salaries 90000
Emp Taxes and Benefits 17300
Supplies 5200
Travel and entertainment 8500
Lease Payment 16200
Depreciation Expense 7800
Total operating expenses (145000)
Operating Profits 35000
Less: Interest Expense (7500)
Net profit before taxes 27500
Less: Tax 30% (8250)
Net Profit After Tax 19250
b. In her first year Cathy Chen had a net profit of 19250 against her total revenue of 180000 which
implies that she successfully covered her expenses from her revenue and was able to book a net profit
of 19250.

Problem 2:

a.

Earnings Per Share = Earning available to common stockholders/ total shares outstanding

Step 1. Calculation of Earnings available to common stockholders

Net profit before taxes 218000

Less: Taxes 40% (87200)

Net Profit After Taxes 130800

Less: Preferred Stock dividend (32000)

Earnings available to common stockholders 98800

Step 2. Calculate EPS

EPS = 98800/85000

EPS = $1.162

b. Earnings available to common stockholders 98800

Less: common dividend (0.80 x 85000) (68000)

To Retained earning 30800

 Owen Davis Company

Balance Sheet

December 31, 2003

Assets

Current Assets:

Cash 215000
Marketable Securities 75000
Accounts Receivable 450000
Inventories 375000
Total Current Assets 1115000

Fixed Assets
Buildings 225000
Equipment 140000
Furniture and Fixture 170000
Land 100000
Machinery 420000
Vehicles 25000
Total Gross Fixed Assets 1080000
Less: Accumulated Depreciation (265000)
Net Fixed Assets 815000
Total Assets $1930000

Liabilities and Stockholders’ Equity

Current Liabilities:
Accounts Payable 220000
Accruals 55000
Notes Payable 475000
Total Current Liabilities 750000
Long Term Debts 420000
Total Liabilities 1170000

Stockholders’ Equity
Common Stock at Par 90000
Paid in capital in excess of par 360000
Preferred Stock 100000
Retained Earnings 210000
Total of Stockholders’ Equity 760000

Total Liabilities and Stockholders’ Equity $1930000

PROBLEM 3

a. Retained Earning = 1575000 + 1365000 = 2940000

Marketable sec = 35000 + 1365000 = 1400000

b. Retained Earning = 1575000 + 865000 = 2440000

Long term debt = 2700000 – 865000 = 1835000

c. Retained Earning = 1575000 + 865000 = 2440000

Buildings = 1600000 + 865000 = 2465000
d. No impact on balance sheet
Problem 4:

Initial Sale Price of Common Stock

(Common Stock Value + Paid in Capital in excess of par)/Number of common shares
outstanding

Initial sale price = (225000+2625000)/300000

= $9.5 Per share

Problem 5:
a. Statement of Retained Earnings

Step 1: Calculate the amount of cash dividend common stockholders

Net profit after taxes 377000
Less: Preferred Dividend (47000)
330000
Less: Change in retained
Earning (1048000-928000) (120000)
Cash dividend paid to Common
stockholder 210000

Hayes Enterprises
Statement of Retained Earnings
For the year ended

Retained Earning on January 1, 2003 928000

Add: Net Profits after taxes (for 2003) 377000
Less: Cash Dividend paid (during 2003)
Preferred Stock (47000)
Common Stock (210000)
Retained Earning on December 31, 2003 1048000

b.

Earnings Per Share =

Earnings available to common stockholder/No. of common shares outstanding

(Net Profit after tax – Preferred dividends)/no. of common shares outstanding

(377000-47000)/140000 = $2.357

c.
Cash Dividend per share

Total Cash dividend to common stocks/ no of common shares

210000/140000 = $1.50
DPS = $1.5
Problem 6.

a. Net Income

Net income = Change Retained earning + Dividend

= retained 2003-2002 + Dividend
= (1500000-1000000) + 200000
= 500000 + 200000
Net Income = 700000

b.
New share issued = outstanding share in 2003 – outstanding share in 2002
= 1500000 -500000
New shares issued= 1000000

c. Average Price Per share 2003

(1000000+4000000)/1000000 =5000000/1000000
Average issuance price of share in 2003 = $5per share
d. Original Price Per share
(Common stocks at par + excess paid in capital)/Number of shares issued
(500000+500000)/500000 = $2.00
a. The main problem Robert may encounter in comparing the companies to one
another on the basis of their ratios is the nature of the industry because they all
belong to different industries and it’s better to look at the companies ratios in
term of the ratio of their respective industries.
b. Due to the nature of the industries these companies belong to, they have more
cash transaction as compare to receivables. This may be one reason of their low
level of quick and current ratio. Hence their account receivable balances may be
lower than the other two companies.
c. The high level of debt for the electric utility company may be all right due to the
less competition in the market and their cash flows are not much volatile however
the cash flows of the software providers are much volatile and they have a great
competition in the market as well.
d. The high rate of return comes with cost say high risk and an intelligent investor
would have in his portfolio a mix of high and risk profile companies hence invest
 all of the amount in the software company is not an intelligent decision as there is
a high chance of loss as well.

a.

2000 2001 2002 2003

Current Ratio 1.88 1.74 1.79 1.55
Quick Ratio 1.22 1.19 1.24 1.14

b. Over the time period of 2000 to 2003 the liquidity of the company is getting worse.
c. The company not efficiently managing its inventory or it has an obsolete inventory.
 a. Average quarterly inventory= 2600000/4 =650000

Finding cost of goods sold

Sales 4000000
Less cogs: (2400000)
Gross Profit 40%= 1600000

Cost of goods sold = 2400000

Inventory turnover = COGS/Average Inventory

2400000/650000= 3.69 times

Average age of inventory = 360/3.69 = 97.6 days

b. As compared to the industry’s inventory turnover of 2 wilkin’s inventory turnover is high

which is a good sign and refers to the efficient inventory management however there may be
issue of stock out if their inventory level is very low.
 a. Average collection period = receivables/average sales per day
= 300000/(2400000/360)
= 45 days
Since the age of the receivable is 15 days beyond the actual net date which implies that the receivable
management of the company is not efficient and the company should pay attention towards it.

b. If 70% of firm sales occur between July and December this would affect the validity of the
evaluation as average sales per day from July to December is actual higher than the earlier
part of the year. Moreover the company has a sales of 193000 in the month of December
which is also the part of the total receivables providing high values. And they should not be
much worried about the amounts of November and December because they are not overdue
but the amount of the earlier month have been over due and they even exceed 60 days.
 Ratio formula Calculation Creek Industry
Debt Total debt/total 36500000/5000000 0.73 0.51
Ratio assets
Times EBIT/Interest 3000000/1000000 3 7.30
interest
earned
Fixed (EBIT+Lease (3000000+200000) 1.9 1.85
payment payment)/interest (1000000+200000)+{(800000+100000)x(1÷(0.6)}
coverage + Lease payment +
ratio {(principal +
preferred
dividend)x(1÷(1-.4)
}

On the basis of above ratios and their comparison to the industry it can be concluded that the
company has high indebtedness and low ability of debt service which provides the basis for rejection
of the loan application by the company.